Arvind Subramanian on demonetisation, then and now

NEW DELHI: Arvind Subramanian, India's former chief economic adviser, has called demonetisation "draconian" in his soon-to-be-released book ‘Of Counsel’. He resigned in June this year due to "pressing family commitments". He took charge as the CEA in October 2014 for a period of three years. In 2017, his term was extended for a year. During a panel discussion at the Delhi Economics Conclave in July 2017, Subramanian had refused to give any firm answer to a question whether he supported demonetisation or had expressed his reservations to the government. He indicated he would write a memoir in which he would disclose his views on demonetisation.Now that memoir will soon be out. This is how Subramanian describes demonetisation in his book: "Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn. The real GDP growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated. In the six quarters before demonetisation, growth averaged about 6.8 per cent (with a four quarter window, the relevant numbers are 8.1 per cent before and 6.2 per cent after)." Though Subramanian had kept his silence on whether he was consulted by the government before announcing demonetisation and whether he supported the government move, it is amply clear for the Economic Survey 2017-18 that Subramanian had no doubts about the benefits that can accrue from demonetisation. In the survey, he refused to deify or demonise demonetisation but was very positive about the long-term benefits of the move and its immediate negative impact vanishing in a short time. " What we can definitely say is that there have been short-term costs but there are also potential long-term benefits which we discuss in detail. Appropriate action can help minimize the former while maximizing the latter," he wrote in the preface.While detailing the short-term cost of demonetisation, Subramanian wrote how demonetisation would benefit in the long term: "At the same time, demonetisation has the potential to generate long-term benefits in terms of reduced corruption, greater digitalization of the economy, increased flows of financial savings, and greater formalization of the economy, all of which could eventually lead to higher GDP growth, better tax compliance and greater tax revenues." Subramanian also warned that "history's verdict" on demonetisation could prove the analysts wrong: "India’s demonetisation is unprecedented, representing a structural break from the past. This means that forecasting its impact is hazardous. The discussion that follows, especially the attempts at quantification, must consequently be seen as tentative and far from definitive. History’s verdict, when it arrives through the “foggy ruins of time,” could surprise today’s prognostications." It seems, while Subramanian was in office, his position on demonetisation was that it would have short-term costs but also long-term benefits depending on effective follow-up actions. He also thought fair evaluation of demonetisation could be done only several years after the move. His description of demonetisation as a "draconian" step in his book is a divergence from his earlier description and analysis of the move.

from Economic Times https://ift.tt/2E5MPtJ